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LEASES
By Karolina Porizkova and Tatiana Alekhina
Controversy Over Lease Classification and
Accounting
• The basic concept of lease accounting is that some leases
are merely rentals, whereas others are disguised purchases.
For instance, if you rent office space for a year, the space is
worth nearly as much at the end of the year as when you
started; you are simply using it for a short period of time.
This rental is called an operating lease.
• If you lease a computer for five years, however, at the end
of the lease the computer is nearly worthless. The lessor
(the person who receives the rents) anticipates this, and
charges the lessee (the person who uses the asset) a rent
that will recover all of the lease's costs, with a profit built in.
This is essentially a purchase with a loan, which is called a
capital lease or finance lease , and an asset and liability must
be set up on the lessee's primary financial statements.
Rental payments are considered repayments of the loan;
depreciation and interest expense, rather than rent
expense, are shown on the income statement.
Meaning
• A finance lease is a lease that transfers
substantially all the risks and rewards incident
to ownership of an asset
• An operating lease is a lease other than a
finance lease.
Objective
• The objective of this accounting standard is to
prescribe
for lessees and lessors, the appropriate
accounting policies and disclosures in relation to all
assets leased that may be finance lease or operating
lease.
• Accounting provided in this AS is based on
SUBSTANCE of the transaction
FORM.
rather than on
EXCLUSIONS
 AS-19 does not apply to the followings:(a) Lease agreement for natural resources such as oil, gas, timber, metals
and mineral rights.
(b) Licensing agreements for items such as motion picture films, video
recordings, patents, manuscripts and copyrights.
(c) Lease agreement to use land.
(d) Agreements for contracts for services that do not transfer the right to
use assets. Example- Use of Taxi
FINANCE LEASE
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A finance lease is a lease that transfers substantially all the risks
and rewards incidental to ownership of an asset.
INDICATORS OF FINANCE LEASE
Transfer of ownership at the end of lease term.
Where lessee has purchased the option at very reduced rates and
lessee is certain to opt for this purchase option at the inception.
Where lease term covers substantial period of economic life of
the asset.
Where amount paid as lease rentals in terms of P.V. is equal to
the fair value of the asset.
Where asset is of specialized nature and cannot be used by
person other than lessee without making major modifications.
INDICATORS OF
FINANCE LEASE
 Long term lease
 Where lease transfers substantially all the risks and rewards
incidental to ownership. Title may or may not eventually be
transferred.
 Where lease cannot be cancelled or can be cancelled only if
the lessor is reimbursed for any losses.
 Where lessee is required to take the risk of obsolescence.
 Where cost of maintenance, taxes and insurance are to be
incurred by the lessee unless the contract so provide for.
OPERATING LEASE
A lease other than a finance lease or where indicators of
finance lease do not exist, such type of lease shall be
classified as operating lease.
INDICATORS OF OPERATING LEASE
 Short term lease
 Where lease does not transfer substantially all the lessor.
 Where the lessee is protected against the risk of
obsolescence, risks and rewards incidental to ownership.
 Where cost of maintenance, taxes and insurance are to
incurred by
Accounting treatment for operating lease:
From Lessee’s point of view
 Lease rental paid/payable by lessee should be recognized as
an expense on systematic basis.
 Systematic basis means an expense should be recorded as
and when benefits are availed. When systematic basis
cannot be identified then straight-line method is used for
recording the expenses.
From Lessor’s point of view
 Lease rental received/receivable by lessor should be
recognized as an income on systematic basis. If same cannot
be identified then straight-line method is used for recording
the incomes.
INCOME TAX ISSUES
• Since Income Tax Act does not recognize the concept of Finance
lease, therefore, there will be timing difference and an
adjustment for deferred tax will be carried out. However, in case
of operating lease accounting treatment is same as per tax laws.
Hence ,there is no difference
TREATMENT AS PER TAX LAWS
LEASE
RENT
Deductible
expenditure in the
hands of Lessee
•Taxable income
in the hands of
Lessor
•Lessor will be
entitled for
depreciation
Thanks for your attention